RadioShack pins Q4 weakness on Sprint

RadioShack warned that its fourth-quarter earnings and margins will be hit primarily due to weakness in Sprint Nextel's (NYSE:S) postpaid sales at its stores.

RadioShack said it expects total sales to clock in at $1.39 billion in the quarter, up 6 percent year-over-year. However, its gross margin will fall to 35 percent, down from 41 percent in the fourth quarter of 2010, and earnings are expected to come in well below analysts' expectations. The retailer said the decline in its gross margin is the result of "a shift in mix within mobility sales towards certain lower margin smartphones and mobile devices; a higher percentage of mobility sales in the overall revenue mix, largely driven by the company's expansion of Target mobile centers; and the impact of a more promotional holiday season."

Specifically, RadioShack said its fourth-quarter results were driven down by the weak performance of Sprint's postpaid products "and reflect further unanticipated changes in Sprint's customer and credit models." RadioShack said these changes meant there were fewer new and upgrade activations and a decline in revenue from Sprint postpaid products compared with the third quarter and year-ago period. The retailer also said its results were impacted by high levels of promotions and ongoing pressures on consumer spending.

A Sprint spokesman declined to comment. Sprint reports its fourth-quarter earnings Feb. 8.

In a research note, Credit Suisse analyst Jonathan Chaplin wrote that Sprint's management has said that RadioShack sales were inflated in the second and third quarters because of aggressive handset discounts, which attracted lower-quality subscribers and led to higher churn at Sprint. Sprint then responded by tightening its credit standards for the fourth quarter. Chaplin also wrote that aggressive promotion of the iPhone by Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T) late in the fourth quarter led to a shift away from Sprint sales at RadioShack. "We think [RadioShack] commentary is consistent with this trend," he said.

RadioShack started selling Verizon postpaid and prepaid wireless products and services in its 4,300 company-operated stores nationwide in mid-September. At the same time RadioShack stopped selling T-Mobile USA products and services. Verizon has pointed to RadioShack as a key point of distribution for its $50 unlimited prepaid "Unleashed" plans.

For more:
- see this release
- see this Reuters article
- see this Dow Jones Newswires article (sub. req.)

Related Articles:
Sprint: iPhone has done 'very, very well for us'
RadioShack inks deal with Verizon, dumps T-Mobile
Independent RadioShack stores to sell Verizon wireless service
RadioShack's contract dispute with T-Mobile is still unresolved

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